Approximately 43% of financial investors hold a positive outlook towards 2025, while around 25% might be making a more astute prediction.
The New Year's Eve clock is ticking down from 2024 to 2025, and that means it's time for some introspection and speculation. Investors will likely review the stocks that gave them the most returns in 2024 and anticipate which ones might bring in the biggest profits in 2025.
The American Association of Individual Investors (AAII) regularly surveys investors about their confidence in the stock market's near-future trajectory. In late November, they discovered that 43% of respondents were optimistic about the stock market over the next six months, while 32% were pessimistic.
Meanwhile, 25% maintained a neutral stance. This neutrality, in my opinion, is the most sensible choice.
Bulls vs Bears
Why are some investors optimistic about 2025 while others are pessimistic?
Euphoric investors, or market bulls, might be considering these ideas:
- The stock market has typically shown growth in most years.
- If interest rates continue to decrease, they could stimulate the stock market growth.
- The increasing use of synthetic intelligence (AI) might spur demand for semiconductor chips, data centers, and various tech-related products, boosting productivity as well.
- Potential reductions in regulations from the incoming administration could supercharge some companies' revenues.
Pessimistic investors, or market bears, might be thinking along these lines:
- After two successive years of double-digit gains, the stock market might be overdue for a correction. It's currently up around 27% year-to-date.
- Many stocks appear to be overvalued.
- Warren Buffett has been hoarding cash, which could indicate that he anticipates favorable investment opportunities.
- Proposed tariffs could throw our economy off balance, as could strained relationships with China.
- Tariffs could potentially lead to inflation and/or trade conflicts.
What will truly happen in 2025?
Despite the bulls and bears' strong convictions, it's crucial to remember that no one has the definitive answer regarding the stock market's direction in the upcoming months or throughout 2025. I like to examine historical returns from the S&P 500, an index comprising around 500 of America's most prominent corporations, as a guide to market timing. Here are some relevant statistics:
- In 1995, the S&P 500 soared by 34.11%, followed by a 20.26% increase in 1996.
- In 1997, it gained 31.01%, followed by a 26.67% growth in 1998.
Even at that point, it would have appeared reasonable to suspect a market decline in 1997 or 1998, yet that never occurred. One might have anticipated a pullback, especially a significant one, following four consecutive years of substantial gains. However, the S&P 500 gained 19.53% in 1999.
There were three years of losses in the early 2000s, with 10.14% in 2000, 13.04% in 2001, and 23.37% in 2002. But then, the market logged eight years of gains, many with double-digit returns.
On balance, no one can predict the market's movements with complete accuracy. It will encounter corrections and crashes every few years, but it has always rebounded from these setbacks. In many instances, the recovery happens within a few months, and the market eventually reaches new highs.
What's the best course of action?
Given this situation, what course should you take? The wisest decision is to continue managing your money responsibly. Maintain a frugal lifestyle and stick to your retirement saving plan. A solid retirement plan is essential for you, isn't it? Avoid high-interest-rate debt and have an emergency fund prepared.
With your stock portfolio, it's advisable to keep any funds that you might require within the next five years (if not ten, for extra caution) out of the stock market, as it can be volatile and you won't want to need to withdraw money during a market correction or crash.
In your investment portfolio, focus on being a long-term investor, purchasing shares in outstanding companies at reasonable prices and holding them for several years, if not decades. Significant returns can potentially occur if you persist in your investment for an extended period.
Consider diversifying a bit of your portfolio in cash, akin to Warren Buffett, allowing you to seize opportunities if the market experiences a downturn. Other than that, simply hope for the best and prepare for the worst, as this advice applies regardless of the stock market's current state.
Investors who are optimistic about 2025 might decide to increase their investing in stocks, as they believe that factors such as the stock market's historical growth and potential decreases in interest rates could lead to profitable investments. On the other hand, pessimistic investors might choose to diversify their finance portfolio, considering the possibility of a market correction after two consecutive years of high returns and the potential impact of proposed tariffs and trade conflicts.
